The Global Food Crisis

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Global Food Crisis

The other day, I was in Target and heard a woman ask her male companion whether reports that there is a food crisis are true. She wanted to know whether she should be worried. Her companion said he was concerned, and, in his opinion, the food crisis would be a bigger problem than global warming.

The conversation struck me as ironic because we live in a land of plenty and we were in a store stocked with food. But every day there are more stories about riots in Somalia or floods in Australia, all relating to the global food crisis.

I would have answered as her companion did, that while we did just walk out of Target, most people in the world do not have such a store easily in reach. In fact, most of the world has probably never even heard of Target.

There has been rioting around the world as a result of growing food shortages and escalating food prices. Earlier this week, shopkeepers in Somalia said they would only accept U.S. dollars as payment and turned Somalis away, leading to intense demonstrations. The United Nations said that about 2.6 million Somalis (approximately one-third of the country’s population) need food assistance to cope with the 40% increase in food prices since January.

Growing demand for meat in emerging markets has led to an increase in the demand for corn to feed the animals, leaving less of it to feed humans.

The use of ethanol in fuel has consumed some of the corn produced in the United States and elsewhere, and driven the price of corn sky high.

Rice is in short supply in part because of a flood in Australia.

A fertilizer shortage is exacerbating these problems and making it difficult for farmers to keep up with the increasing demand for food. As the price of fertilizer increases, the price of food increases and the less food people are able to purchase.

In some places, such as Iowa, farmers have built large hog barns to supply their farms with manure to spread on their crops. This will likely save the farmers money because they will not be buying so much expensive fertilizer. Unfortunately, the quality of the nutrients in the manure is much less than nutrient-rich chemical fertilizer, ultimately leading to less food produced for more hungry people.

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The man I overheard in Target isn’t the only person who thinks the food crisis will be bigger than some other crises our world currently is facing.

Donald Coxe, a global portfolio strategist at BMO Financial Group, said that the problems surrounding the credit crunch and escalating oil prices will pale in comparison to the global food crisis. Coxe said he believes food prices will continue to rise sharply as the demand for meat and dairy products skyrockets in places such as China and India.

The amount of U.S. grain stored for the upcoming seasons is the lowest on record, relative to consumption, according to Coxe, who spoke at the Empire Club’s 14th annual investment outlook in Toronto in January.

About 54% of the world’s corn is grown in the United States, and Coxe said that exports of corn from the United States are in danger of flattening out in the next three years if the country continues to subsidize ethanol production.

When environmentalists first touted ethanol as a Green way to lessen oil consumption, it seemed like a viable solution–a viable way to help us being weaning off foreign oil. This would be a way for farmers to make more money, the U.S. to use less crude oil and for fewer pollutants to be released into the air.

But it hasn’t exactly worked out like that.

The diverting of corn to the fuel market has lead to a shortage of corn to feed humans and animals, leading to a spike in food prices. Farmers now cannot keep pace with the demand for corn and other crops, such as wheat and soybeans.

Emerging markets have also placed a huge demand on food production worldwide, as an expanding global middle class wants meat and better quality grains.

There was even an article in the Boston Globe recently about how rising wheat prices are making it difficult for local restaurants to put out as much free bread as before because of rising wheat prices. Some eateries have stopping giving out free bread unless it is specifically requested, while others said they would continue to serve bread no matter the cost.

As long as people need food and fuel, we will need well-managed companies to provide innovative ways to deliver them, and the best of those companies likely will turn into great investments. The Cabot team is already busy finding them.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.

Cabot Wealth Advisory 5/5/08 – We Should Have Known Better

In Monday’s issue of Cabot Wealth Advisory, Paul Goodwin wrote about the lessons learned from when the technology bubble burst in 2000. Many investors held onto their stocks even as they plummeted, believing in the mantra of time, not timing. Paul also writes about VanceInfo, a Chinese IT outsourcing enterprise that had its IPO in December 2007. Stock featured in this issue: VanceInfo (NYSE: VIT). Click the link below to read the full issue.

Book of the Week: “Tape Reading and Market Tactics: Three Steps to Successful Stock Trading” by Humphrey Neill

Humphrey Neill, who later became famous as the Vermont Ruminator, wrote this book in 1931 when he was vice president of Westel Market Bureau, Inc. Neill’s three steps to successful trading are: (1) Familiarize yourself with the methods of the institutions that move the market. (2) Learn how to interpret the actions of both these groups and the investing public. (3) Achieve mastery of yourself; of the “temperament, emotions, and the other variables that go to make up human nature.”

The biggest obstacle to successful trading is the inability to cut losses short, as Neill said, “The one thing which retards success in trading, more than any other, is the unwillingness of many of us to accept losses, cheerfully and quickly, when we realize that we have misjudged the action of the market.”

This timeless advice reminds us of good investment practices.

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Have a great weekend. I’ll be back with you next Saturday!

Until next time,

Elyse AndrewsEditor, Cabot Wealth Advisory

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Market Update

From Cabot Dividend Investor

The market continues to lean bullish, with warning signs. While the Dow has been hitting all-time highs, the S&P has gone nowhere for two weeks and the Nasdaq has actually lost ground. Investors seem to be deserting “risk-on” assets, leading to underperformance in the Russell 2000 (IWM) and high-growth sectors including Semiconductors (SMH) and Biotechs (XBI).

On an individual stock level, earnings reactions have been leaning negative. Companies that disappoint are punished severely, while companies that beat are rewarded weakly, if at all.

Meanwhile on the fixed income side, Friday’s hot payrolls report increased inflation expectations and drove bond yields higher over the weekend. But yesterday’s North Korea panic drove investors out of stocks and into conservative assets, driving bond yields lower once again. “Risk-off” classes, including utilities, benefited.